Is Your Money Working For You? (and How To Check)

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I have amazing colleagues. They are smart, proactive and energetic people who have a drive to get things done. That’s a big part of our company culture and a reason  why I like working there. It just doesn’t work that well with everyone.

At a meeting this week, we had this very bright person come in to give us an update on a project that had been going on forever. He is definitely smart: he is fluent in several languages, has extensive experience in his domain and has very good presentation skills. In all honesty, he’s got a very strong resume.

But there’s one problem.

If he gets slightly distracted, it will take him forever to get anything done.

To keep our own projects on-track, we need to make sure his own projects don’t get delayed. We keep track of everything he’s involved in. We clarify the goals, the timelines, the expectations and we regularly follow-up. It is a little time consuming, but it’s an investment. In the long run, it will be well worth it.

Well, as it turns out, that’s also exactly how I manage my investments.

Are My Investments Actually Doing Any Work?

Investments can also get distracted and put us off-track. A new fee comes up, a portfolio becomes unbalanced. There’s a multitude of reasons we want to make sure our investments actually deliver.

So on a yearly basis, to keep my investments under control I calculate the 5 numbers that I need to track to reach Financial Independence. This has been very helpful for me and my wife to zoom out and see how our finances look from 10,000 feet.

I don’t know about you, but the way I designed my plan to reach financial independence by 2021 is extremely simple. I used only 2 variables:

  1. How much can I save on a yearly basis,
  2. How much return I expect from my portfolio every year.

I thought to myself that if I track my yearly savings, I probably also need to keep an eye on the actual returns!

My thoughts were confirmed when I saw this chart from JPMorgan, showing the difference between a 2.25% ROI and a 6.5% ROI, here the blue and the green lines:

Investment Comparison Chart
Investment Comparison Chart

It’s huge!

Saving is important, but knowing how hard our investments are working is equally critical.

What’s your Return On Investment?

The way I calculate my ROI is very simple and I need only 3 values:

  1. My Net Worth at the beginning of the year (Net Worth Start),
  2. My Net Worth at the end of the year (Net Worth End),
  3. How much I have added to my investments (Contributions).

I then calculate the ROI as follows:

ROI = (Net Worth End – Net Worth Start – Contributions) / Net Worth Start.

A few examples, if you start the year with 100,000$ and you end it with 120,000$.

  • If you have contributed 0$, the ROI is 20%
  • If you have contributed 20,000$, the ROI is 0%
  • If you have contributed 5,000$, the ROI is 15%
  • if you have contributed 25,000$, the ROI is -5% (ouch)

For example, in 2015, my ROI was 5.2%.

This was clearly not an amazing return, but it was also not too far from the 6% I had used to project my FI date. The stock market didn’t generate any return last year, my Oil and Gas stocks got slammed and the returns mostly came from my 401k.

This allows me to check if my financial plan is on track.

Have you also used a 6%-8% yearly return to project your financial plans? How do you keep track of this number, do you use the ROI calculation?

-Nick

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16 COMMENTS

  1. This is actually a nice ballpark method to use… I add it to my list of FI things to check out once and a while.
    As 2015 was the first year we started, ether were too many discoveries of things to add to our net worth… Let’s see what 2016 brings.

    • You need at least a year of data, so you could use it at the end of this year. I’d like to see how others do, there could be ways to improve returns if we knew how others’ portfolio performs.

  2. We tend to project more conservatively — more like 4% as our baseline, just because (as your recent post questioned!) the markets may not continue with their historical averages forever. So we’re essentially hoping to beat inflation by a little, and then we’ll be happy, and if we do better, then great! Also, we did a projection and saw that the difference of a *single* percentage point return in our actual retirement account dollars is a difference of $5 million over our lifetimes. If that doesn’t make the case for making sure you’re paying the lowest management fees, I don’t know what does!

    • You’re right, 1 percentage point can make a huge difference! It’s really good that you guys did the math so you know what to expect.
      Like you, I would take the $5M anytime if that means replacing an expensive advisor with a low-cost index funds that basically works for (almost) free! (not to mention that apparently, thanks to Warren Buffett’s recent bet, not only is it cheaper but it also performs better).

  3. I do something similar but rather than look at a single year’s ROI, I like looking at a 5-yr trend. A single year is too short and five seems about right, as long as you have five years of investing history behind you. My plan also assumes a range with a lower and higher bound, rather than a single number.

    Boiling things down to a handful of “dashboard” numbers is always good to get that quick snapshot and make decisions without analysis paralysis.

    • Congrats for having done this for 5+ years! I absolutely agree with you that having key dashboard numbers (to not say KPI, which sounds very corporate) is the best way to keep on top of things. This is a good idea to use a lower and higher bound, this would help forecast a ideal and less than ideal scenario. Good point!

  4. It is smart to look back and actually check that the figures we use in our plan is appropriate. I haven’t done any look back yet since this year is our first year of really saving towards FI but plan to do a review at the end of the year. As for my plan, right now I use 7% as my target but will evaluate and adjust as needed in the future.

    • Isn’t easy? 😉 actually, there are many things in personal finance that are simple and look easy. What’s usually more difficult is being consistent about it.
      2021 is a great goal and like you I wouldn’t mind getting there quicker than planned. Hopefully we both get there before then!

  5. Hey Nick, great post!!! I have actually projected to do 10% annually and I assess my numbers every 3 quarter. I like the formula you pointed out. I hope to retire by 33-36. At this point I am actually confidant I will make it.

    • Retirement by 33-36 is a great goal, you’re ahead of me!
      This is interesting that you use 10% annual return, can you give more details on how you plan to get that yield?

      • Its all specified in my blog, but its primarily through real estate. I’ve specialized in deep-value real estate deals which yield 20%+. I invest in Portugal, and I know the market really well. Many investment opportunities there!

        • 20% is great, it sounds like you have a solid plan. Portugal is such a nice country, I remember going to Porto and Lisbon a few years back, it was a great trip!

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